A Free-Market Energy Blog

Real Politic: Carbon Tax Pessimism (Part I)

By Kenneth P. Green -- August 8, 2013

“The day after enactment, environmentalists will start calling for raising the carbon tax, decoupling it from revenue neutrality to finance more wind and solar boondoggles. And they’ll still want additional regulations to drive emissions down faster. If conservatives resist this, they’ll get the same ‘denier’ routine they get now.”

I first started working on climate policy in 1997, first in California, then Canada, and then in Washington, D.C. Having spent seven years inside the Beltway, I’ve now returned to Canada, working for the Fraser Institute on natural resource policy.

In the states, I watched the U.S. edge nearer-and-nearer to very bad climate policy, that being a mixture of cap-and-trade and ad hoc regulation. The inside-the-beltway “consensus” was that we were inevitably headed for national greenhouse gas (GHG) control legislation.

Study after study warned that national mitigation policies would cause significant economic damage, be regionally discriminatory, be economically regressive, and reduce U.S. competitiveness internationally. The climate effects from such policies were much more modest, if discernible. This very bad combination inspired the ‘all pain, no gain’ moniker from free-market groups.

Caps vs. Taxes: The Old Debate

In that policy environment, I co-authored a study at the American Enterprise Institute (AEI) with Kevin Hassett and Steve Hayward in 2007. Climate Change: Caps vs. Taxes explored what an ideal carbon tax would look like, and why such a tax would be better than cap-and-trade—and better than regulation.

Our study found that a $15/ton carbon tax

would result in an 11 percent decline in CO2 emissions, while raising non-coal-based energy forms modestly. Coal-based energy prices would be affected more strongly, which is to be expected in any plan genuinely intended to reduce GHG emissions. A number of possible mechanisms are available to refund the revenues raised by this tax. On net, these tools could significantly reduce the economic costs of the tax and quite possibly provide economic benefits.

We never actually called for implementing such a tax; we just said if you structure it thus, a carbon tax would do less harm than cap-and-trade and regulations. Our exact words were, “For these reasons, we conclude that if aggressive actions are to be taken to control GHG emissions, carbon-centered tax reform–not GHG emission trading–is the superior policy option.”

Still, after that publication, carbon-tax proponents thought I was in their camp, and I started to be asked to speak about carbon taxes, serve on panels to discuss carbon taxes, and to write about the same in various magazines, newspapers, etc.

But a funny thing happened on the way to the Forum: I noticed none of the people actually advocating carbon taxes wanted anything like an economically-idealized carbon tax.

Not only that, they did not want carbon taxes instead of regulations, they wanted carbon taxes andtrading systems and regulations.

I came to realize that my speaking about our idealized carbon tax was, in a sense, playing into the hands of people who wanted a very non-idealized tax regime. As I wrote in 2011:

… watching states loot “dedicated” eco-taxes for general revenue; seeing the emergence of more proposals for revenue-raising carbon taxes to finance continued deficit spending; and generally bearing witness to endless insincerity on the part of greens and their allies, I have to admit that my friends in the free-market movement were right: A carbon tax would simply become another general revenue raiser, and a step in carbon-seduction.

5 Comments

Well-done. And I look forward to Part II. Citizens might also benefit, I suspect, from a basic discussion of green house gases, i.e., which ones are they, how bad (or good) are they, what (if anything) should be done about them? Speaking for myself, I’m at the point where I don’t think anything extraordinary should be done about limiting CO2. Earth isn’t Venus. Even Venus isn’t Venus (in terms of an Earth-like green house effect). Anyway, please, soldier on.

Kenneth,
You make good points about the slipperly slope of enacting legislation, but where do we go from here?
I look forward to your second post tomorrow to see if you have any ideas on how to tackle the real problem of capping the concentration of CO2 in the atmosphere in order to prevent an increase in sea level, an increase in global average temperatures, and a decrease in ocean pH.

While we might disagree on the right path forward, we likely agree that the US shouldn’t adopt a carbon tax until there is a global policy on GHG emissions. It would be silly to adopt a carbon tax if China didn’t join us.

Speaking of carbon taxes …. It is interesting to note that many states levy so-called severance taxes on produced oil and natural gas (and perhaps some other products of resource extraction). Here in Texas, said tax revenue is exploding (see Eagle Ford, et al) and is now being seriously considered by the legislature as a new source for highway funding. A virtuous circle, perhaps? Though certainly not in the eyes of the AGW alarmists.

First, the carbon tax you described burdens the wrong tax base – American carbon-emitters. America does not own the atmosphere and is not the source of all GHGs in it, so taxing American emitters would be ineffective. However, Americans do consume massive quantities of goods produced in countries that emit GHGs with abandon, such as China. Until those countries reduce their GHG emission-to-productivity to levels comparable to America’s, America is the best place to produce those goods. Therefore, the best tax base is high-emission imported goods and the best tax a carbon tariff, which would be passed on to American consumers of the taxed goods.

Think about the politics of a carbon tariff: Populist-protectionist and thus capable of winning blue collar support as well as the support of labor, the energy and the manufacturing sectors. The carbon tax you described makes enemies of the same because it increases the cost of American-produced goods relative to imported ones. What is more, a carbon tariff would preserve the current entrenchment against the carbon tax, carbon trading and regulation policies.

In sum, inefficiency due to burdening the wrong tax base as well as lousy present and future political positioning are what’s wrong about a carbon tax in today’s U.S. policy debate. A carbon tariff may solve those problems.